UK shoppers brace for new Brexit test as inflation picks up

Plunge in the pound since the Brexit vote threatens to squeeze retailers’ profit margins by making imports more expensive


An employee places a sales sign in the window of the Miss Selfridge Retail Ltd. fashion retail store on Oxford Street in London, UK. Photo: Bloomberg
An employee places a sales sign in the window of the Miss Selfridge Retail Ltd. fashion retail store on Oxford Street in London, UK. Photo: Bloomberg

London: British consumers, who helped the economy emerge largely unscathed from the Brexit vote, now face their next big health check.

A week after Next Plc offered a grim outlook for 2017 following a downbeat holiday selling season, Marks & Spencer Group Plc, department-store chain Debenhams Plc, grocer J Sainsbury Plc and other retailers are set to provide business updates. Their insights will be scoured for clues on household spending and whether the economy will continue weathering the UK’s decision to leave the European Union.

Consumer confidence has held up surprisingly well since the June EU vote, and borrowing is surging. But the coming months pose a challenge for consumers—even those as seemingly unflappable as Britain’s. An expected sharp upswing in inflation and uncertainty over the economic outlook could threaten households’ capacity to splurge.

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“We’ve seen pretty strong rates of both retail sales and overall spending growth,” said Paul Hollingsworth, an economist at Capital Economics in London. “But that drop in the pound that occurred after the referendum, that’s going to start to feed through more into inflation over the course of this year, and households are going to start to feel the impact.”

If Brexit’s aftershocks spread to the UK’s 487 billion-pound ($604 billion) retail industry, they’ll add to upheaval caused by changes in consumer behaviour, with people buying more online.

Many are also prioritizing spending on experiences such as vacations or eating out over, say, a new pair of shoes, though even businesses in those sectors are experiencing some fallout. Celebrity chef Jamie Oliver plans to close six of his Italian restaurants around Britain after the pound’s Brexit-induced weakness pushed up costs.

A busy week of Christmas trading updates from UK retailers picks up on Tuesday with Wm Morrison Supermarkets Plc, followed by Sainsbury a day later. Debenhams, Marks & Spencer, online retailer ASOS Plc and supermarket operator Tesco Plc are all set to report on a blockbuster on Thursday.

In November, Marks & Spencer said the impact of Brexit “remains uncertain,” citing currency volatility, confidence and the potential for new trade tariffs. While the FTSE 350 Index gained 13% in 2016, the Retail Supersector Index fell for a third year.

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While consumer spending supported the economy in 2016, there could be payback ahead. According to the Bank of England, some households brought forward purchases of bigger-ticket items like furniture and electrical goods in anticipation of stronger price increases, meaning they could be planning to spend less this year.

A plunge in the pound since the Brexit vote threatens to squeeze retailers’ profit margins by making imports more expensive. So far they’ve found it hard to pass along higher costs to consumers. But pressure will grow, and inflation is forecast to hit close to 3% by the end of this year. That’s one reason the BOE sees economic growth slowing to 1.4% from 2.2%.

Demand this year could be supported by further wage growth, which would compensate for faster inflation, or a continued appetite for credit. Morgan Stanley said in a report last week that it expects a gradual consumer slowdown where inflationary pressures are substantial, while noting that it’s “eating humble pie” after getting its 2016 forecasts wrong.

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The bank’s view is that sustained resilience would take a “Goldilocks Brexit,” though developments so far suggest that outcome may be a long shot.

Prime Minister Theresa May has said she plans to trigger the formal EU exit process by the end of March, and much of the economic impact will depend on how the divorce plays out and how households react. In the meantime, the economy’s strength will reinforce the views of those who want to push for a hard Brexit.

“This year might be a somewhat more difficult year for the consumer,” said BOE Chief Economist Andy Haldane. “We’ve had a hefty fall in the exchange rate, the effects of which on prices in the shops is beginning to trickle through. That will in turn produce something of a squeeze on the spending power of consumers, and may lead them to throttle back.” Bloomberg

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